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If Europe Is Going To Hurt The U.S., Nobody Told The REITs

The real estate investment trust (REIT) industry held its annual summit in New York last week at NAREIT’s REITWeek, and while many of the presenting companies acknowledged the omnipresent threat of Europe’s debt crisis, few said they are seeing any appreciable impact on their businesses.

Generally speaking, many of the REITs have limited, if any, direct exposure to Europe, but a number of executives seemed relatively sanguine about any carryover impact on the U.S. economy from the troubles across the Atlantic.

“[We] hear all the worry about Europe,” said General Growth Properties CEO Sandeep Mathrani, but retailers from that part of the world are still expanding into U.S. markets, because “Americans like to shop. The mall operator’s chief said companies like H&M, Zara and Top Shop have all moved to develop or increase their U.S. presence.

Kimco Realty Executive Chairman Milton Cooper went even further. He thinks the ongoing issues in Europe are “a blessing in disguise.” During the resulting flight to safety, America has been an attractive alternative. “In a way, it increases demand for U.S. real estate from those thinking about investing in Europe.”

David Simon, Chairman and CEO of Simon Property Group, argued that the success of firms like his is still tied can withstand the tremors out of Europe if U.S. growth proves resilient. “As long as we have economic and wage growth, the American will consume,” he said. “It’s just part of our culture.”

The fairly upbeat tone from retail-focused REITs was matched by that of their peers elsewhere in the industry, like office properties. While executives from the likes of SL Green Realty, Boston Properties, and Vornado Realty Trust acknowledged the threat posed by Europe, all said the fallout is not yet turning up in their businesses to any notable extent.

Vornado Chief Executive Michael Fascitelli described his firm as “optimistic, but cautious,” and noted its ability to withstand the pressures posed by a lack of growth from financial services firms, a key tenant for many REITs in prime markets like Manhattan. SL Green executives noted the same, as did Boston Properties President Douglas Linde, who said that things have slowed on a broad scale over the last 12-18 months as fiscal issues at home and abroad “became the focus of everyone’s dinner conversation again.”

That said, Linde stressed that Boston Properties is in markets where conditions are better than the economy at large. “The best properties in the best markets are above the fray,” he added.

One critical element of the REIT business that could face trouble emanating from Europe is financing in both equity and credit markets, but at REITWeek the tone from executives was one of confidence.

Marc Holliday, SL Green’s chief executive, described the capital markets as “fantastic,” a characterization echoed by a number of his competitors throughout the industry.

Jeremy Diamond, head of research at Annaly Capital Management, a mortgage REIT that uses leverage to maximize the spread between the mortgage-backed securities it buys and its cost of capital, said the repo markets the firm operates in are tremendously deep and liquid. The AAA-rated assets the firm deals in are getting scarcer, “yet there is all this money out there that needs a return.”

The REIT research team at Barclays Capital highlighted the attractive financing trends and the relatively sanguine tone on Europe in a June 14 note recapping the NAREIT conference. BarCap noted that there was “little discussion about concerns of Europe having an impact on U.S. fundamentals” from the commercial office firms or retail companies, and that liquidity is strong enough to boost transaction volume in the latter space, despite volatile markets.

To hear the companies in the space tell it, it’s a great time to be a REIT, in practically every subindustry. But is it a great time for investors to get involved? NAREIT’s senior vice president of research Brad Case argues that on a historical basis the industry still looks attractive so long as funds from operations (the standard earnings metric in the sector) deliver the expected growth over the next few years through higher occupancy and stronger rent growth.

CNBC’s Jim Cramer expressed confidence of his own in REIT space during a lunchtime keynote on the conference’s first day June 12. We can’t be worried about every stock because of what’s going on in Italy or Spain, he said. “On my show I say there’s always a bull market somewhere. And right now, it’s here in this room.”

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